Amazon's boundless spending tested as sales growth slows

Published 7:52 pm, Friday, January 31, 2014

Amazon.com's willingness to gain customer loyalty by shouldering the costs of nationwide shipping and access to online movies has its limitations.

The stock fell 11 percent after a 20 percent jump in operating costs led Amazon to miss analysts' fourth-quarter profit estimates Thursday. The company is now considering raising the price of its $79-a-year Prime membership for the first time. That service, which includes two-day shipping and endless video streaming, may increase by $20 to $40 a year in the U.S., the company said.

Amazon's expenses have been climbing as CEO Jeff Bezos pumps money into new initiatives like warehouses to speed shipments and research on home-delivery drones. While Bezos continues to tout "world-class customer service" -- a phrase he used in Thursday's statement -- there are limits to how much he's willing to subsidize users.

"They are launching drones for delivery, but when you miss earnings, investing in risky technology like that gets put on the back burner," said Gene Alvarez, an analyst at Stamford-based researcher Gartner.

The stock closed at $358.69 in New York Friday, declining the most since Nov. 13. The shares have climbed 35 percent in the past year, compared with the Standard & Poor's 500 Index's 19 percent advance.

Net income was $239 million, or 51 cents a share, the Seattle-based company said Thursday. Analysts on average had projected profit of 69 cents a share, according to data compiled by Bloomberg. Operating costs climbed to $25.1 billion from $20.9 billion a year earlier.

Sales in the holiday quarter increased at the slowest rate since 2008. Revenue rose 20 percent to $25.6 billion, trailing the $26.1 billion average analyst estimate. The company's dominance of U.S. e-commerce isn't translating globally, with international sales growth slowing to 13 percent in the quarter from 21 percent a year earlier.

"What we see is continued growth, but a slowing rate of growth," said Michael Pachter, an analyst at Wedbush Securities in Los Angeles who rates the stock the equivalent of a hold.

Tom Szkutak, Amazon's chief financial officer, said on the conference call with analysts that the potential increase in Prime is the result of higher fuel and shipping costs. The company hasn't lifted the price since introducing the service nine years ago, he said.

"Customers like the service and they are using it a lot more," Szkutak said. He also said additions to Prime such as access to online movies and television shows, which the company must pay to acquire, is adding to the cost of the service.

Amazon, which sells everything from high-definition televisions to toy trains, is still taking market share from brick-and-mortar retailers like Best Buy Co.

The e-commerce market is expected to climb 15 percent this year to $300.6 billion, according to researcher EMarketer Inc. Cyber Monday, the first Monday after Thanksgiving, was the heaviest Web-spending day on record, with consumers shelling out more than $2 billion, according to ComScore.

The record holiday season brought some snafus as well. Amazon and other retailers issued rebates after United Parcel Service and FedEx, overwhelmed by demand, were late in delivering some packages to customers.

"It's entirely possible that they have trained consumers to just buy Christmas presents at the last second, and weren't prepared for the logistical issues," Pachter said.

Sales in North America jumped 26 percent in the period to $15.3 billion. Operating margin, a metric of profitability, rose to 2 percent from 1.9 percent a year earlier.

The company's loyal band of investors is betting on Bezos's ability to deliver continued sales growth as Amazon adds online video options, bolsters its line of Kindle devices, wins business customers for its cloud servers and expands its grocery-delivery service. Amazon doesn't disclose sales of individual products.

Amazon's stock rally, which dates back to late 2008, has driven its price-to-earnings ratio for the past 12 months to more than 1,400 -- about 85 times higher than the average of companies in the S&P 500. Apple, which earlier this week reported profit of $13.1 billion, trades for 12.4 times earnings.

Amazon forecast first-quarter sales of $18.2 billion to $19.9 billion, compared with the average analyst estimate of $19.7 billion, according to data compiled by Bloomberg. For operating income, results will range from a loss of $200 million to a profit of $200 million.

"This is a leading e-commerce company taking huge amounts of share in what is still an incredibly large retail opportunity," said Chad Bartley, an analyst at Pacific Crest Securities in Portland who has the equivalent of a buy rating.